Que 1- Que 7

Que 1:- What do you mean by the Doctrine of Indoor Management under
Corporate Law? What are the exceptions to the doctrine of Indoor
Management?

Ans 1:- The ‘Doctrine of Indoor Management’ which is famously known as the ‘Turquand’s
Rule’ is an old established principle which came to be recognized 150 years ago in the context of
‘Doctrine of Constructive Notice’. The Doctrine of Indoor Management is an exception to the
Doctrine of Constructive Notice. The doctrine of Constructive Notice seeks to protect the
company from the outsider whereas the Doctrine of Indoor Management seeks to protect the
outsider from the company.

This doctrine emphasizes on the concept that an outsider whose actions are in good faith and has
entered into a transaction with a company can have a presumption that there are no irregularities
internally and all the procedural requirements have been complied with by the company. This is
the protection which is provided by the Doctrine of Indoor Management. Though it is necessary
for the outsider to be well versed with the Memorandum and Articles of Association of the
company in order to seek remedy for the same. The government authorities are also within the
purview of this doctrine.

Origin

The Doctrine of Indoor Management has originated from an English case called Royal British
Bank v. Turquand .   Hence, the alternative name to this doctrine is the ‘Turquand Rule’. In this
case, the directors of the company had been authorized by the Articles to borrow on bonds that
sum of money as they should from time to time by passing a special resolution in a General
Meeting of the company. A bond under the seal of the company which was signed by the
secretary and the two directors were given to the plaintiff to draw on the current account without
the authority of any resolution. Turquand sought to bind the company’s action on the basis of
such bond. Thus, the main question of law in this matter was whether the company can be held
liable for that bond. The court, in this case, held that the bond was binding on the company as
Turquand was entitled to presume that the resolution of the company has been passed in the
general meeting.

The Memorandum and Articles of Associations are Public documents and hence can be
inspected by the public. But whatever is happening internally in the company is not known to the
public. An outsider is oblivious to the internal procedures of the company and hence the
outsiders are entitled to presume that all the internal procedures are catered by the company.

Position under the Indian Companies Act, 1956

The Doctrine of Indoor management can also be traced in the Indian Companies Act, 1956 under
Section 290, which is explained as follows:

Validity of acts of Directors

Acts done by a person as the director shall/can be valid notwithstanding that later it may be
discovered that his appointment was invalid due to any disqualification or defect or was
terminated by any provision of the Act or the Articles. Provided that nothing in the section shall
give validity to any of the acts done by a director after his appointment has been shown to the
company to be invalid or terminated.

Judicial Interpretation of Doctrine of Indoor Management

The Judicial interpretation of the Doctrine of Indoor Management is viewed in light of the
purpose of this doctrine. Business is a field which demands the protection of all parties under a
contractual relationship. This doctrine of Indoor Management is apparently for protection of the
outsiders dealing with the company but additionally, it’s more important purpose is to promote
the investments in the business sector in order to strike a balance between the business and the
economy.

In the case of Dey v. Pullinger Engg Co. Justice Bray had rightly pointed out that the wheel of
commerce would not go smoothly if outsiders dealing with companies were forced to conduct an
investigation of the internal procedure and machinery of the company to see if something is not
wrong.

Additionally, Lord Simonds in the case of Morris v. Kanssen Stated that the people in the
business world would be shy in entering into transactions with companies if they were to check
into the depth of the internal workings of the company.

An Investor only has a tendency to invest in companies if they are secured in all aspects. If the
Investors are not secured, then the companies will lack investments which overall will negatively
impact the economy. Thus, the protection given to the investors under this doctrine is a pertinent
step towards promotion of trade and commerce.

Exceptions to the Doctrine of Indoor Management

The Doctrine of Indoor Management is more than a century old. The companies in today’s time
have come to occupy the centric position in economic and social life in the modern communities,
it is important to widen the scope of this doctrine, else it stands narrow and in complete favour of
the outsiders to the company and brings a lot of risk to the Companies. Eventually, in the modern
time, the Doctrine of Indoor Management has been subjected to various exceptions which are as
follows:

Knowledge of Irregularity

When an outsider who is entering into a transaction with a company has constructive or actual
notice of the irregularity in relation to the internal management of the company, then He/she
cannot seek remedy under the doctrine of Indoor Management. There can be some cases, where
the outsider is himself/herself a part of the internal procedure.  

For example, in the case of T.R. Pratt(Bombay) Ltd. v. E.D. Sassoon & Co. Ltd. Company A had
lent money to Company B for mortgaging its assets. The procedure for the same which was laid
down in the Articles for such nature of transactions were not complied with. The Directors of
both the companies were the same. It was held by the Court that the lender was aware of such an
irregularity and hence the transaction was not binding.

Another Example of the same is, X and Y are two directors of a company. A transfer of shares in
the company had been approved by both X and Y.  X was not validly appointed and Y was
disqualified by reason of being the transferee itself. These material facts were known to the
Transferor of the shares; Hence the transfer of shares was not binding and stood ineffective.

Forgery

It is pertinent to note that the Doctrine of Indoor Management does not apply in cases where an
outsider relies on a document which is forged in the name of the company.   A company can
never be held liable for the forgeries committed by its officers.

For example, In the case of Ruben v. Great Fingall Ltd. The Plaintiff was a transferee of the
share certificate issued under the seal of the defendant company. The certificate was issued by
the Company’s secretary who has forged the signature of the two directors of the company and
had affixed the seal of the Company. The plaintiff, in this case, had contended that whether the
signature was forged or genuine comes under the purview of the internal management of the
company, therefore the company shall be held liable for the same, But it was held by the court
that the doctrine of Indoor Management has never extended to cover a forgery. Lord Loreburn
had interpreted that an outsider dealing with companies are not bound to inquire into their indoor
management and will not be affected by any irregularities of which they are unaware of.

Negligence

Where an outsider entering into a transaction with a company could discover the irregularities in
the management of the company if he/she would have made proper inquiries, then he/she cannot
seek remedy under the doctrine of Indoor Management. The remedy under this doctrine is also
not available where the circumstances and situations surrounding the contract are so suspicious
that it invites inquiry, and the outsider of the company does not make any efficient inquiry for
the same.
For example, in the case of Anand Bihari Lal v. Dinshaw & Co. The Plaintiff had accepted a
transfer of a company’s property from the accountant of the company.  It was held by the court
that the transfer is void in nature as such a transaction was beyond the scope of the accountant’s
authority. It was the duty of the plaintiff to check the power of attorney that was executed in
favour of the accountant by the company.

Acts that are beyond the scope of apparent authority

Acts done by an officer of a company which are beyond the scope of its apparent authority will
not make the company liable for any of the defaults caused by the officer. In such a case, the
outsider cannot seek any remedy under the doctrine of Indoor Management simply because
Articles did not delegate the power to the officer to do such acts. The outsider can only sue the
company under the doctrine of Indoor Management if the officer had the delegated power to act
on those grounds.

For example, in the case of Kreditbank Cassel v. Schenkers Ltd., the branch manager of the
company had endorsed a few bills of exchange in the name of the company in favour of a payee
to whom he was personally indebted. The Company did not give him any authority to do so. It
was held by the court that the company was not bound. Additionally, it was also stated that if the
officer of the company commits fraud under his apparent authority on behalf of the company,
then the company will be held liable for the act of fraud committed by the officer.

The same can be observed in Sri Krishna v. Mondal Bros. & Co. The manager of the company
had the apparent authority under the Memorandum and Articles of Associations of the company
to borrow money. The manager borrowed money on a hundi but did not place the same in the
strong box of the company. It was held by the court that the company was bound to acknowledge
the hundi,  As the creditor had a bona fide claim for recovering the money on the grounds of
fraudulent acts done by the officer of the company.

Representation through Articles

This exception is the most confusing and highly controversial aspect of the Turquand Rule.
Articles of Association generally contain a clause of “power of delegation.” For example, in the
case of Lakshmi Ratan Cotton Mills v. J.K.  Jute Mills Co. One B was the Director of the
company. The company comprised of managing agents of which B was also a Director. The
Articles of Association authorized the directors to borrow money and also empowered them to
delegate this power to one or more of them.  B borrowed a sum of money from the plaintiff.
Further, the Company refused to be bound by the loan on the ground that there was no resolution
passed directing to delegate the power to borrow given to B. Yet it was held in the case that the
company was bound by the loan as the Articles of Association had authorized the director to
borrow money and delegate the power for the same.

The doctrine of Indoor Management which is a century old concept has been knitted in
accordance to the needs of the modern time. This doctrine is solely for protecting the interests
and the rights of the third party who enter into transactions with the company in good faith and to
whom the company stands indebted.  This rule mainly emphasis on the fact that outsiders
entering into transactions with a public company are not bound to conduct a proper enquiry into
the company’s internal procedures and processes and additionally will not be affected by any of
the irregularities in the internal processes which they are unaware of. The Turquand rule has
subsequently been applied in many Indian cases for protecting the interest of the third parties
against the companies. In due course of time, for the correct application of this doctrine, several
exceptions have emerged to serve the purpose of the doctrine in the modern era like forgery,
negligence, knowledge of irregularity, acts done beyond the scope of the apparent authority, etc
which strikes a balance in providing reasonable protection to both, the outsiders to the company
and the company.

Que 2:- Explain the doctrine of Constructive Notice.

Ans 2:- The doctrine of Constructive Notice, the term company does not have a
strict definition, even though it is defined in the  Companies Act, 2013 (hereinafter
referred to as ‘the Act’) under Section 2(20). It means a body corporate registered
under the Act or any previous law. It includes all companies, whether they are
public or private. A company is a public entity, to the extent that some of its
documents are always available in the public domain, as soon as the company
registers itself. It thereby becomes imperative that any person who transacts any
business with the company is conversant with all the rules and regulations of the
company which are available in the public domain. This apparent presumption is
called the Doctrine of Constructive Notice.

The Memorandum of Association (hereinafter referred to as ‘MOA’) and the

Articles of Association (hereinafter referred to as ‘AOA’) of every company are
registered with the Registrar of Companies under the Ministry of Corporate Affairs,
which is a public office. The two documents are the most important ones for a
company and work as the constitution for the company. Furthermore, it is necessary
to know that the MOA and AOA are public documents, accessible to all persons.
Therefore, the law poses a duty on a person transacting with the company to be
well-versant with the two documents of the company. It is the duty of a person
making a contract with a company that his contract should conform to the AOA and
MOA of the company. If not, the company cannot be made to fulfil the contract and
no remedy lies for the contracting party due to this legal obligation put on him. This
rule comes into help if a dispute arises regarding the regulation of the company
which was a part of the AOA or the MOA of the company in violation of which, a
contract has been signed between an outsider and a company representative, on
behalf of the company.

History of the Doctrine of Constructive Notice

This is a common law doctrine and applicable in England as well as India, on same
lines. The corporate law jurisprudence is somewhat similar throughout the globe,
therefore, the principles of the corporate world are followed almost everywhere.
This principle also has been adopted by the courts of many countries. The doctrine
of constructive notice is one of the basic postulates of corporate law. The author
shall be discussing the doctrine in detail in this article.
Doctrine of Constructive Notice

The term Constructive Notice is based on the term ‘constructive’ which means
something which can be deduced by inference, a fact that was apparent and must
have been known to the party. Therefore, a constructive notice shall mean such facts
that are expected to be known to a person by virtue of some inference. This
inference is drawn because of a legal duty that is put on a person to be aware of
certain circumstances. In the corporate jurisprudence, it means such information
which is expected to be known to a person who is transacting with a company
because such information is available in public domain, irrespective of the fact
whether it was known to him or not. The doctrine of constructive notice is a legal
fiction that puts the liability on a person to have known any fact regarding the
company which is available in the public domain.

The law providing for this presumption is provided under  Section 399 of the Act
which allows any person to inspect, take extracts from or make records of any
document of any company which has been registered with the Registrar of
Companies. The section provides for a fee, on payment of which, this right shall be
provided to the applicant. The right extends to the inspection of any public
document of any company. The MOA and AOA of the company are public
documents and available for scrutiny at all times. Under this provision, the doctrine
of constructive notice was instituted whereby a person is expected to be aware of
the contents of any document which is available in the public domain. Before a
person plans to transact with a company, he must inspect all the documents related
to the company and ensure that the content of his transaction conforms to the rules
of the company. This is an implied and a presumed notice given to the person who
wishes to transact with the company notably called the ‘Doctrine of Constructive
Notice’.

This doctrine applies to such provisions which are available in the public domain.
In the case of Oakbank Oil Co. v. Crum it was held that anyone who is dealing with
the company shall be presumed to have read and understood the MOA and AOA of
the company, thus presumes to be a notice to the public. Such a notice is called
constructive notice.

Impact of Doctrine of Constructive Notice

The effect of the doctrine of constructive notice is harsh on a person who wishes to
transact business with the company. It puts the liability on the person transacting
any business with the company to inspect all the documents of the company
available in the public domain to ensure that his contract conforms with the rules of
the company. This matter was discussed in the case of  Kotla Venkataswamy v.
Rammurthy. In this case, the plaintiff accepted a mortgage deed executed by the
secretary who was a working director of the company only. The AOA of the
company specified that such a deed needs to be executed by three specific officers
of the company and it shall not be valid otherwise. Therefore, they were denied any
protection by the application of this doctrine.

Another necessary implication of this rule is that a person transacting business with
the company is considered to have read all the public documents of the company
and understood them for what they mean. Such a person is also presumed to
understand the powers that the company’s officers are authorised to execute. In the
case of Re Jon Beauforte (London) Ltd case , an insolvent company’s objects were to
manufacture dresses but the company was manufacturing veneered panels. The
knowledge of this development was with the creditors. Therefore, in the insolvency
proceedings, their claim was not carried out for being ultra vires.

In a case where the act is declared to be ultra vires the company’s AOA or MOA, a
person cannot claim any relief on the ground that he was unaware of the said
provision in the documents. The principle of common law jurisprudence of
corporate law provides ample protection to an innocent person who is dealing with
the company in good faith where the act concerned is not ultra vires to the
company, but the protection cannot be extended in a case where the said act is
beyond the authority of the company.
The doctrine of constructive notice was established by the House of Lords in the
case of Ernest v. Nicholls where it was held for the first time that any person who is
dealing with the company is deemed to be familiar with the contents of all the
public documents of the company. Further, in the case of  Mahony v. East HolyFord
Mining Co. Where it was held by the House of Lords that in the case of absence of
the doctrine of constructive liability, the rules of the partnership will apply.

However, it was also categorically accepted by the British courts that the rule of
constructive notice has drastic impacts on the corporate world and mainly investors.
The courts are bound to apply them even if that equals to injustice for the persons
involved. At times, the provision may be vague and subject to an internal procedure
of the company. In such a scenario, the application of the Doctrine of Constructive
Notice will amount to an injustice being met on persons. Therefore, to mitigate such
a situation, the doctrine of Indoor Management, also known as Turquand’s Rule was
established by the courts. 

Que 3:- One Person Company (OPC) is a new feature of Companies Act, 2013.
Discuss the feature of One Person Company.

Ans 3:- To understand a “One Person Company”, henceforth referred to as OPC, it becomes
essential to first analyse what a company is. The word has no strict technical or legal meaning. 
In terms of the Companies Act, 2013, A “company” means a company incorporated under this
Act or under any other company law.
 The growth of the concept of incorporation and company law arose from England’s need to set
up a mercantile empire. The first and the best known example of these efforts is the
establishment of the East India Company, as early as in the 1600’s. However their growth was
initially slow and did face a number of obstacles, primarily because of the expenses accompanied
by the process of forming a company. But this period was also a corner stone that marked the age
of growing commercial needs, rise of unincorporated partnership, trading, sales etc. To begin
with, the English Parliament completely prohibited these individual private concerns. But the
persistent need for commercial growth forced the Parliament a century later to repeal the Bubbles
Act and put forward the Joint Stock Companies Act of 1844 and then again in 1856, which
finally enabled incorporation of both private and public companies.
 With this new trend, governments all over the world started supporting the existence and growth
of Private and Public Companies either limited by shares or by guarantee or unlimited in nature.
However the need for statutory provisions to facilitate a single individual to incorporate a
company according to his own objectives was equally felt. This, like most other concepts, was
also first recognised in Britain. It is often said that Common Law in England developed out of
the recognition of personal rights and it is these rights themselves that have been given the
ultimate respect. When the concept of personal right was read in consonance with the provisions
for forming a company, the question which popped up in every mind was whether a single
person could in fact, in exercise of his personal rights, form a company. I.e. whether a person’s
individual right to form a trade, business or commerce would be curtailed by the provisions of
Company Law which required at least two members to start a company?

 To answer this it is important to turn back the pages of history and refer to the landmark case
of Salomon v. Salomon & Co Ltd. More than 115 years ago the House of Lords in this very
judgment confirmed the doctrine of separate legal entity; that a company is distinct from its
shareholders and is not the shareholders’ agent. This doctrine is now adopted as the law of most
countries. However, what makes Salomon a landmark case is not only the doctrine of separate
legal entity, which was already there for more than 200 years before Salomon was decided, but it
is also because of the recognition of “one-man company”. In arriving at such decision, Lord
MacNaghten noted that “it does not matter whether the power to control the company is within
only the hands of one person as long as the shares are fully paid up”. His Lordship further
observed that the conclusion was not “contrary to the true intention of the Companies Act, or
against public policy, or detrimental to the interests of creditors.” Thus the idea of a single
person controlling a company has been in existence in Britain for a long time.
Indian scenario
 In India, the Companies Act, 1956 was the first comprehensive attempt at creating a statute for
companies and related matters. It was a piece of legislation based on the English Act. Though
comprehensive, it was a bulky legislation which had to be periodically amended.  Presently, we
have the Companies Act, 2013 which has brought in a wave of new changes that are expected to
take the industries to a new level, in tune with those of the international fora.
 The most controversial of these provisions is the one relating to the concept of One Person
Companies or OPC’s. This concept of OPC was first recommended by the expert committee of
Dr. JJ Irani in 2005. In its report the committee had observed,

 “With increasing use of information technology and computers, emergence of the service sector,
it is time that the entrepreneurial capabilities of the people are given an outlet for participation in
economic activity. Such economic activity may take place through the creation of an economic
person in the form of a company. Yet it would not be reasonable to expect that every
entrepreneur who is capable of developing his ideas and participating in the market place should
do it through an association of persons. We feel that it is possible for individuals to operate in the
economic domain and contribute effectively. To facilitate this, the Committee recommends that
the law should recognize the formation of a single person economic entity in the form of ‘One
Person Company’. Such an entity may be provided with a simpler regime through exemptions so
that the single entrepreneur is not compelled to fritter away his time, energy and resources on
procedural matters.”
 OPC are expected to provide a whole new bracket of opportunities for those who look forward
to start their own ventures with a structure of organized business. OPC will give the young
businessman all the benefits of a private limited company, which categorically means they will
have access to credits, bank loans, limited liability, legal pr Reasons for formation
 Under the ‘old’ Companies Act, 1956 a minimum of two members were required for formation
of a Private Limited Company. This was a hindrance to the entrepreneurs who wanted to go
‘solo’. According to the old Act, the only options were either to form a private company with a
minimum of two members or a public company with a minimum of seven members, which was
either limited by shares or by guarantee or was unlimited. The reason provided by the
parliamentarians for having at least two members for a private company was so as to
differentiate it from a sole proprietorship concern which could be started by any individual. But
people started forming companies by adding a nominal member/Director and allotting them a
single share, which was a pre-requisite to be a Director, and retaining the rest with themselves.
This was a way of bending the law, in order to satisfy the legal provisions while at the same time
exercise dominance. This was seen by the legislatures as a fraudulent activity. Though it was
formed in compliance with the statutory provisions, it seeks to violate the very reason for which
such a restriction was imposed. I.e. the mischief sought to be remedied by section 12 of the
Companies Act, 1956 was to ensure that a company would not be left to the sole control of an
individual but would rather be shared by at least two individuals. But this intention of the
legislature was defeated by incorporating private companies with a nominal member. Later, it
was established that there is nothing wrong in permitting one person to form a company with
proper checks and balances, upholding the Constitutional right of an individual to start a
business, trade or commerce on his own, ensuring that it is not for the purpose of defrauding the
public.
 It was in order to achieve this situation that the 2009 Company Law Bill first considered the
concept of OPC as proposed by the J.J. Irani Committee. It however did not materialise. The
2012 Bill however succeeded in this venture and it gave rise to the Companies Act, 2013 which
includes provisions for OPC’s as well.

 In addition to this, it was also realised that incorporating this idea into the 2013 Act would give
the unorganised proprietorships an opportunity to incorporate themselves and thereby gain the
advantages of incorporation. An OPC would thus provide a unique blend of functioning a sole
proprietorship with the advantages of an incorporated company.

 OPC provides a legitimate way to form a company with only one member. It can work like
proprietorship but it holds the status of company and of course enjoys the benefits that come with
it (limited liability, trust factor etc.)

 Distinct features of an OPC

 One Person
The most prominent and striking feature of an OPC is the fact that it has only:

 One Director
 One shareholder – both rolled into one.
This is the most distinctive feature of an OPC. Since it has only one Director, he exercises
complete control over the functioning of the enterprise. He is also the only single shareholder. It
can however have a maximum of 15 Directors. Member/Shareholder of the One Person
Company acts as first Director, until the Company appoints Director(s)
 Minimum Paid Up Capital
 It shall have a minimum paid up capital of Rs.1lakh

 Nominee
 The Act clearly prescribes that the Director of the company shall appoint a nominee to take
charge of the company when the sole Director/member is disabled or diseased. The nominee
shall be a natural person, Indian citizen and resident in India. The name of the person has to be
provided in the memorandum.
 The naming can however only be done with the prior consent of the nominee in writing. The
reason being that he is accepting to take on the company with all its liabilities as well; the
registrar has to make sure that the nominee has voluntarily consented to it. The written consent
has to be filed with the registrar at the time of incorporation along with the Articles and the
Memorandum.

 Provisions are provided for the nominee/ other person to withdraw his consent at any
time. Further, the member/Shareholder of OPC may change the nominee/other person at any
time, by giving notice to the other person and intimate the same to Company. Then the Company
should intimate the same to the Registrar
otection for business, access to market etc. all in the name of a separate legal entity.

Meetings
 With respect to Board Meetings (Section 149 (1) (a))
 At least one meeting of Board in each half of a calendar year and the gap between 2 meetings
should not be less than 90 days. However, no Board Meeting is required, if there is only one
Director. If there is any business which is required to be transacted in a Board meeting and OPC
has only 1 Director, then it will be sufficient if the resolution by such Director is entered in the
minutes-book and is signed and dated by such Director and such date shall be taken as the date of
Board meeting.
 With respect to Annual General Meetings (Section 96 (1))
 There is no requirement of holding AGM, however any business which is required to be
transacted at an AGM or other general meeting, by means of an ordinary or special resolution,
shall be taken as passed by OPC, if the resolution is communicated by the member to the
company and entered in the minutes-book and signed and dated by the member and such date
shall be deemed to be the date of the meeting.

 Financial Statements
 Financial statements of OPC may not include the Cash Flow Statement (Section 40). It may only
include Balance Sheet, Profit & Loss and any explanatory note, as a part of the same. Unlike
other companies, here it is to be signed by only one Director. A copy of the financial statements
is to be filed with the Registrar of Companies, within 180 days from the closure of the financial
year.
 Style of Writing Name Of Company
 ‘‘(One Person Company)’’ is required to be mentioned in brackets below the name of such name
of the company, wherever its name is printed, affixed or engraved.
 Annual Return
 Annual return is required to be prepared by OPC and be signed by the Company Secretary (CS)
of Company and when there is no CS, by any Director of Company.  However, it is not clear,
whether the same is required to be filed with ROC, as the time limit of filing return is connected
to the date of holding AGM, however, we know that OPC is not required to hold AGM. Hence, it
is an open question.
 Non-Applicable Clauses
 As far as an OPC is concerned, in Chapter VII, it is provided that the following sections
prescribing certain formalities and procedures are not applicable. This is to ensure less
technicalities and efficient functioning of an OPC. This can be treated as an exception or an
exemption as suggested by Mr. J.J. Irani
Provisions which are not applicable to an OPC as per the Companies Act, 2013 are scheduled
below:

 Clause 98: Power of Tribunal to call meetings of members,

 Clause 100: Calling of extraordinary general meeting,
  Clause 101: Notice of Meeting,
 Clause 102: Statement to be annexed to notice,
 Clause 103: Quorum for meetings,
 Clause 104: Chairman of meetings,
 Clause 105: Proxies,
 Clause 106: Restriction on voting rights,
 Clause 107: Voting by show of hands,
 Clause 108: Voting through Electronic means,
 Clause 109: Demand for poll,
 Clause 110: Postal Ballot,
 Clause 111: Circulation of members’ resolution.
The OPC has been exempted from the above provisions in view of the opinion of the Irani
Committee and also in view of its special nature. Most of the powers are exercised by the sole
Director himself; as a result many of the above provisions lose their relevance with respect to an
OPC.

 Contract By One Person Company

 If an OPC limited by shares or by guarantee enters into a contract with the sole member, who is
also the Director of the company, then it should be ensured that the terms of contract are
contained in a memorandum or are recorded in the minutes of the first meeting of Board, held
next after entering into contract. However, it should not apply to contracts entered into, in the
ordinary course of its business. The company shall inform the ROC of such a contract and shall
record the approval of the Board in the minutes, within a period of 15 days of the Board meeting.

One Person Company is defined in Sub- Section 62 of Section 2 of The Companies Act, 2013,
which reads as follows:

‘One Person Company means a company which has only one member’
One of the primary reasons for introducing OPC is to provide individuals the benefits of
incorporation while functioning a like a sole proprietorship. The question thus is, what are the
advantages that make the title of a company more coveted than that of a proprietorship?
The advantages of incorporating into an OPC are similar to those of any other company, but
these have not been afforded to proprietorship concerns. The following should give a brief idea
as to why OPC is much better option than a proprietorship concern:-

1. Independent Corporate Existence

 Like any other company, an OPC will have its own existence, which is separate from that of its
Director/shareholder. The principle was first emphasised in Salomon v. Salomon & Co Ltd. A
company is in law a person, having perpetual succession and a common seal. It forms a distinct
legal persona independent of its member.  Thus an OPC becomes a body corporate capable
forthwith of exercising all the functions of an incorporated individual. It becomes
impersonalised. In the words of Palmer,
 “The benefits following from incorporation can hardly be exaggerated. It is because of
incorporation that the owner of the business ceases to trade in his own person. The company
carries on the business, the liabilities are the company’s liabilities and the owner is under no
liability for anything the company does, although as principal shareholder, he is allowed to take
full advantage of the profits which the company makes.”
 Further in T.R. Pratt v. E.D. Sasoon & Co. Ltd the Bombay High Court has held that,
 “Under the law, an incorporated company is a different entity, and although the entire share
maybe practically controlled by one person, in law a company is a distinct entity…”
 This is in contradistinction to a proprietorship where there is no separation of identity between
the individual and his business. They function as one and share the same identity.

2. Limited Liability
 As already stated, an OPC shall function as a private company. It does not talk about limited
liability per se. it is however implied that the liability of its shareholder is limited to the value of
his shares invested. In the case of an OPC, since one person holds all the shares, his liability will
be complete with respect to his investments in the company. I.e. all his shares in the company
will be liable to be attached in case an issue crops up. His personal assets will however be
protected.
In a proprietorship, all the assets of the individual will be attached and there is no limitation on
the liability. Liability extends to his personal belongings as well.

3. Perpetual Succession 
The Director of the company must mandatorily nominate a successor to be the sole member in
case of his death or disability. The qualifications have already been discussed to be a nominee.
He shall act as the new Director and take over the business. Thus essentially the business is
handed over to another person but it still continues ti survive. “Members may come and go but
the company can go on forever”. It is to be noted that the liabilities and all assets will also shift
hands in this process.
A proprietorship on the other hand ceases to exist when the true owner dies. As it shifts hands, its
identity changes; and hence the former proprietorship ceases, and a new one may rise.

4. Separate Property 
Here again, since a company has a separate legal entity, any property acquired by it will be its
own. It is capable of owning, enjoying and disposing of the property in its own name. It becomes
the owner of its own assets. The member does not have an insurable interest in the property of
the company. The shareholder has any right to any item of property owned by the company, for
he has no legal or equitable interest therein. Thus incorporation helps the property of the
company to be clearly distinguished from that of the member.
In a proprietorship there is distinction of identity. The owner is the proprietor and any property
owner by the proprietorship is his and vice versa. As a result any creditor of the proprietorship
will have a valid claim on all the assets of the owner.

5. Transferability Of Shares
In an ordinary company, shares are treated as movable property. Thus any individual can sell his
shares in the open market and get back his investment without having to withdraw money from
the company. But in an OPC, there is only a single member. The question of transferring a
portion of the shares does not arise because then it ceases to become a “one” person company.
He cannot transfer all the shares as well as this will lead to major alterations, including changes
in the Memorandum of Association as the single owner is changing. Variations will also have to
be made with respect to the nominee.
This issue has not yet been dealt with by the parliamentarians and the above is a personal view
on logical interpretations. It would thus appear that in the case of an OPC, transferability of
shares is restricted.

Such a question need not arise in the case of a sole proprietorship.

6. Capacity To Sue And Be Sued

An OPC has the capacity to sue and be sued on its own behalf. In fact this is one of the primary
advantages that follow from being a separate legal entity. Criminal complaints can be filed by or
against an OPC, but it has to be represented by a natural person, which in this case would ideally
be the single Director or any Director if there more than one.

Being a separate entity, it has always been bestowed with the power to protect its fair name. Any
act which affects its reputation or is likely to cause damage to its business can raise a reasonable
cause of action.

Such a question need not arise in the case of a sole proprietorship. The owner sues on his own
behalf and on behalf of the proprietorship.

Conversion
 What are the circumstances in which OPC automatically ceases to be an OPC? 
 An OPC shall cease to be an OPC when either the paid up share capital exceeds Rs. 50
lakhs or its average annual turnover during the relevant period exceeds Rs. 2 crores and
within 6 months of such date, it shall either convert the OPC into a Private Company with
2 members and 2 Directors or Public Company with 3 Directors and 7 members.
 How can an OPC willingly convert into Private of Public Company? 
 It can do so by increasing its Directors and members and paid-up capital to that of
Private/Public Company and by following the procedure of conversion in section 18 of
the Act.
Flaws – the other side of the coin
 A brief reading of the above pages will reveal that an OPC is indeed a harbinger of progress and
industrial growth. It has its fair share of advantages. It provides a perfect mixture of the unique
characteristics of a company while performing with the independence and freedom of a sole
proprietorship. The following are some useful tips to note before going into an OPC.
1. Tax Obligation 
Since the end result is the formation of a company, it is unfortunate to note that it will be subject
to the same tax obligations. Tax usually falls under the following heads for a company:

 Corporate tax – 30%

Minimum alternate tax – 8.5%

Dividend distribution tax – 15%

 An OPC may be exempt from some or all of these, but it will still be seen as a company and
hence taxed more heavily than a sole proprietorship. The issue arises primarily because many of
the sole proprietors who want to incorporate may not be able to afford such heavy levy of taxes.
As a result there are chances of winding up soon after its inception.

 In a sole proprietorship on the other hand as there is not any difference from between the
concern and the owner, the only tax he is obligated to pay is the income tax in association with
the profits he makes at the concern. This will not be burdensome as there are specific limits set
up in the Income Tax Act for different income groups. The person will therefore only have to
pay the reasonable amount set up by the government.

2. Fraud
 OPC’s may also be abused to conduct fraudulent business. This is partly reflected in England by
the fact that private companies registered with a capital of less than £5000 rose from 20% to 33%
from 1897 to 1901.
  It seems that fraud committed through one-man companies has been a problem for ages. While
most frauds OPC’s commit can also be committed by genuine companies, the lack of balance in
powers and interests within a one-man company makes it easier for the one-man to commit fraud
for his personal benefit. For instance, according to the new Act a person can form as many as
five OPC’s. Under such circumstances, the one-man may avoid liability by setting up numerous
one-man companies, and transfer the property belonging to a problematic company to another
company quickly as the companies are under the control of a single person.
3. Creditor’s Psychology
 It is also relevant to note that most of the creditors of the company will be sentient of the danger
posed by this new concept. Usually a company which has at least two members is a welcome
investment. Banks are willing to give loans and there are creditors available. But when it comes
to a single individual the chances of him manipulating or using the company name for fraud are
always present and the chances of being duped are greater since unlike an ordinary company, the
only decision that counts is that of the sole member’s and the only person actively involved in
the decision making process is he himself. Even if there are more Directors, it still does give the
sole member a kind of veto power over all the rest. Thus there are chances of these companies
facing a hard time when it comes to getting financial aid.

4. Liability For The Director

It is no secret that a Director of a company may become liable for his actions under certain
circumstances. The one-directing-mind nature may make one-man companies easier to be
criminally liable. Even in cases where the Director is not to be personally liable, the liability
maybe directed at the Director as he is the person in control of the functioning of the business.
 It is often seen that the principle of “lifting the corporate veil” has been resorted to in instances
where it is pertinent to find the person who is responsible for the acts of the company. But here
the courts are even discharged from that duty as there is just one primary share holder and one
principal Director. Fingers maybe easily pointed at him even in cases where he may be innocent.

 Suggestions & Conclusion

 Now that both sides of the coin have been analysed, it is time to determine which outweighs the
other. These ventures do provide benefits in comparison to a sole proprietorship, but then again
is it the safer alternative?
Trust still lies in the traditional private and public companies. But a one-man company is by
itself not a bad thing as it can encourage business venture and makes better use of market
resources. Many jurisdictions have already recognised private one-man companies. For example,
it is recognised by the European Economic Community,one-man private company is also now
recognised in Hong Kong under the Companies Ordinance Section 153A(1). Similar provisions
are visible in Pakistan, UAE and Singapore. There can however be improvements to the
legislation. Learning from the experience of other countries it is safe to say that “where there is a
will, there is a way, and this way need not always be the right one”. Minor improvements here
and there can go a long way in improving the present set up.

For one, there should be a regulatory body to ensure that the activities of the company are within
the legal framework and that there is no misappropriation of funds. Further, allowing a person to
pioneer as many as five OPC’s is another lacunae which can be used by the person to avoid
liability by shifting the burden; the number has to be restricted to a maximum of two or three. He
may however be allowed to be a member of board of Directors of other companies.

This new concept may lead to people forming companies to generate profits themselves leaving
the liability to the company and washing their hands of any liability. This is still a pilot attempt
in a country like India. Thus as far as an individual is concerned, it is suggested that a sole
proprietorship is still the better alternative. There are still areas which are shady and can lead to a
lot of ambiguity and may cause loss to the person. It might take years to prove that the system
works flawlessly, but in the meantime, it is impossible to reverse the development of one-man
companies. Instead, it is more important to think of measures to prevent it being used as a sham.
One may expect more restrictions to be imposed on one-man companies by the legislature and
the judiciary to ensure that the protection is individual right will not be used as a forum to
commit fraud on general public.

Que 4:- Discuss the provision relating to Incorporation of Company under

Section 7 of the Companies Act, 2013

Ans 4:-
INCORPORATION OF COMPANY (SECTION 7):

All document related to incorporation shall be filed be filed before the registrar, in whose
jurisdiction registered office of a company is proposed to be situated. A Registrar may have
jurisdiction over several states or only a part of a state. Following documents are to be submitted:
(a)  The Memorandum and Articles of the company duly signed by all subscribers;

(b) A declaration by

1. an advocate or Practicing professional (CA, CS, CA) who is engaged in incorporation,

and
2. a person named in director as Director, Manager or Secretary,
 That all requirements related to incorporation has been complied with;

(c)  an affidavit from each subscriber and from each person named as first director in the articles
that;

1. he is not convicted if any offence in connection with promotion, formation or

management of any company,
2. he is not been found guilty of any fraud or misfeasance or of any breach of duty to any
company during preceding five years, and
3. all the documents filed with the Registrar contain correct, complete and true  information
to the best of his knowledge and belief;

(d)  the address for correspondence till its registered office is established;

(e)  the particulars of every subscribers along with proof of identity;

(f)   the Particulars of first directors along with proof of identity; and

(g)  the particulars of interests of first directors in other firms or bodies corporate along with their
consent to act as directors.

The registrar shall issue Certificate of Incorporation and also allot a Corporate Identity Number
(CIN).
The company shall maintain and preserve at its registered office copies of all documents and
information as originally filed at the time of incorporation till its dissolution under this Act.

FORMATION OF COMPANIES WITH CHARITABLE OBJECTS ETC (SECTION 8):

Where a person or an association of person proposed to be registered as a limited company –

(a)  has in its object the promotion of commerce, art, science, sports, education, research, social
welfare, religion, charity, protection of environment or any such other object;

(b)  intends to apply its profit or other income in promoting its objects; and

(c)  Intends to prohibits the payment of any dividend to its members;

The Central government by license issued and on specified condition allows that person or
association of person to be registered as a limited company without addition to its name of the
word “Limited” or Private Limited. The registrar shall on application, register such person or
association of person as a company.

The company registered under this section shall enjoy all the privileges and be subject to all the
obligations of limited companies.

A firm may be a member of the company registered under this section.

A company registered under section 8 shall not alter its memorandum or articles except with the
previous approval of the Central Government. A company registered under this section may
convert itself into company of any other kind only after complying with such conditions as may
be prescribed.

An existing limited company may convert to a company registered under this Section.
The Central Government may, by order, revoke the license granted to a company registered
under this section if the company contravenes any of the requirements of this section or any of
the conditions subject to which a license is issued or the affairs of the company are conducted
fraudulently or in a manner violative of the objects of the company or prejudicial to public
interest, and without prejudice to any other action against the company under this Act, direct the
company to convert its status and change its name to add the word “Limited” or the words
“Private Limited”. No such order shall be made unless the company is given a reasonable
opportunity of being heard. Sub – section (6) to (9)  and (11)  has provisions in this matter.

A company registered under this section shall amalgamate only with another company registered
under this section and having similar objects.

EFFECT OF REGISTRATION (SECTION 9):

From the date of incorporation such subscribers to the memorandum and all other persons, as
may, from time to time, become members of the company, shall be a body corporate by the name
contained in the memorandum, capable of exercising all the functions of an incorporated
company under this Act and having perpetual succession and a common seal with power to
acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to
contract and to sue and be sued, by the said name.

EFFECT OF MEMORANDUM AND ARTICLES (SECTION 10):

The memorandum and articles shall, when registered, bind the company and the members to the
same extent as if they respectively had been signed by the company and by each member, and
contained covenants on its and his part to observe all the provisions of the memorandum and of
the articles.

All monies payable by any member to the company under the memorandum or articles shall be a
debt due from him to the company.
FALSE AND INCORRECT INFORMATION ETC. AT INCORPORATION (SECTION
7):

Yes, I am talking about Section 7 once again.

If any person furnishes any false or incorrect particulars of any information or suppresses any
material information, of which he is aware in any of the documents filed with the Registrar in
relation to the registration of a company, he shall be liable for action under section 447.

Additionally; at any time after the incorporation of a company, it is proved that the company has
been got incorporated by furnishing any false or incorrect information or representation or by
suppressing any material fact or information in any of the documents or declaration filed or made
for incorporating such company, or by any fraudulent action, the promoters, the persons named
as the first directors of the company and the persons making declarations shall each be liable for
action under section 447. Please note, only first directors and subscribers.

Additionally, the Tribunal may, on an application made to it, on being satisfied that the situation
so warrants –

(a)     Pass such order as it may think fit including changes in its memorandum and articles; or

(b)     Direct the liabilities of the members shall be unlimited; or

(c)     Direct removal of its name from the register of companies; or

(d)     Pass an order for the winding of the company; or

(e)     Pass such other order as it may deem fit.

Que 5:-There are certain requirements for formation of company under
Section 3 of the Companies Act, 2013. Discuss those requirements.

Ans 5:- Lawful purpose:- Section 3 states that a Company may be formed for any lawful
purpose. Thus, no company shall be formed for carrying on any unlawful objects.

Subscription to Memorandum:-The Person who sign on the memorandum are termed as

subscribers. The Provisions relating to subscription of Memorandum are explained as below:-

1. In case the Company proposed to be formed is a public company, the memorandum must
be subscribed to by seven or more persons.
2. In case the Company proposed to be formed is a private company, the memorandum must
be subscribed to by two or more persons.
3. In case the Company proposed to be formed is OPC, the memorandum must be
subscribed to by one person.

Public Company

According to section 2 (71) of the companies Act, 2013“public company” means a company
which—

(a) is not a private company;

(b) has a minimum paid-up share capital as may be prescribed:

Provided that a company which is a subsidiary of a company, not being a private company, shall
be deemed to be public company for the purposes of this Act even where such subsidiary
company continues to be a private company

Private Company

According to section 2 (68) of the companies Act, 2013 “private company” means a company
having a minimum paid-up share capital as may be prescribed, and which by its articles,—

(i) restricts the right to transfer its shares;

(ii) except in case of One Person Company, limits the number of its members to two hundred:
 (iii) prohibits any invitation to the public to subscribe for any securities of the company;

Provided that where two or more persons hold one or more shares in a company jointly, they
shall, for the purposes of this clause, be treated as a single member:

Provided further that—

(A) persons who are in the employment of the company; and

(B) persons who, having been formerly in the employment of the company, were members of the
company while in that employment and have continued to be members after the employment
ceased,

shall not be included in the number of members;

One Person Company (OPC)

According to section 2 (62) of the companies Act, 2013, ‘One Person Company (OPC)’ means a
company which has only one person as a member.

The Companies Act, 2013 has introduced new concept of ‘One Person Company’ (herein after
referred to as ‘OPC’). Section 3 (1) (c) has been notified vide notification dated 26th March,
2014 and the same has been effective from 01st April, 2014.

It is a new form of business by which company can be incorporated with one person only. It
enables the entrepreneur carrying the business in the Sole-Proprietor form of business to enter
into a Corporate Framework. One Person Company is a hybrid of Sole-Proprietor and Company
form of business, and has been provided with relaxed requirements under the Companies Act,
2013.

Member of OPC

 Only a natural person (Rule 3(1)(a)) of Companies (Incorporation) Rules, 2014;

 The person should be an Indian citizen and resident in India only (Rule 3(1)(a));
 No person shall be eligible to incorporate more than one OPC (Rule 3(2)).
 A member of OPC becomes a member in another OPC, by virtue of his being a nominee
in that OPC; such member shall meet the eligibility criteria specified in sub rule (2) of rule 3
within a period of one hundred and eighty (180) days (Rule 3 (3));
 No minor shall become member of the OPC or can hold share with beneficial interest
(Rule 3 (4)).
Nominee of OPC

The subscriber to the memorandum of OPC shall nominate a person, after obtaining prior written
consent of such person, who shall, in the event of the subscriber’s death or his incapacity to
contract, become the member of that OPC (Rule 4 (1)).The name of the person nominated under
sub-rule (1) shall be mentioned in the memorandum of One Person Company and shall be filed
in Form No. INC-3 with the Registrar at the time of incorporation of the company along with its
memorandum and articles.

 Only a natural person can become a nominee (Rule 3(1) (b));

 The nominee should be an Indian citizen and resident in India only(Rule 3(1) (b));
 No person a become nominee in more than one OPC (Rule 3(2));
 No minor shall become nominee of the OPC (Rule 3 (4)).
Explanation – the term “resident in India” means a person who has stayed in India for a period
of not less than one hundred and eighty two (182) days during the immediately preceding one
calendar year.

Withdrawal of Consent by Nominee

 The nominee may, withdraw his consent by giving a notice in writing to –

 such sole member; and
 The One Person Company.
The sole member shall nominate another person as nominee within fifteen (15) days of the
receipt of the notice of withdrawal and shall send an intimation of such nomination in writing to
the Company, along with the written consent in Form No INC 3 [Rule 4 (3)].

Change the name of Nominee

 The subscriber or member of OPC may, by intimation in writing to the company, change
the nominee at any time for any reason including in case of death or incapacity to contract of
nominee and nominate another person after obtaining the prior consent of such another person
in Form No INC 3 [Rule 4 (5)].
 The company, in both the case, shall within thirty (30) days of receipt of the notice of
withdrawal of consent or change the name as the case may be, file with the Registrar, in Form
No INC 4 along with the written consent of such another person so nominated in Form No. INC
3 [Rule 4 (4) & (5)].
Note: Any change in the name of the person as Nominee shall not be deemed to be an alteration
of the Memorandum

Appointment of Nominee in case of change in Membership

 Where the sole member of One Person Company ceases to be the member in the event of
death or incapacity to contract and his nominee becomes the member of such One Person
Company, such new member shall nominate within fifteen(15) days of becoming member, a
person who shall in the event of his death or his incapacity to contract become the member of
such company, and the company shall file with the Registrar an intimation of such cessation and
nomination in Form No INC 4 within thirty days of the change in membership and with the prior
written consent of the person so nominated in Form No. INC 3.(Rule 4 (6))
Restrictions

 OPC cannot be incorporated or converted into a company under section 8 of the Act.
(Rule 3 (5)).
 OPC cannot carry out Non-Banking Financial Investment activities including investment
in securities of any body corporates (Rule 3 (6)).
 No OPC can convert voluntarily into any kind of company unless two years have expired
from the date of incorporation ((Rule 3 (7));
Exception – If paid up share capital exceeds Rs. 50,00,000/- (Rupees Fifty Lakhs) or its average
annual turnover during the relevant period exceeds Rs. 2,00,00,000/- (Rupees Two Crores) or if
during financial year its balance sheet total exceeds one crore rupees, it would cease to be
continue as an OPC. However, such OPC would be mandatorily required to convert itself within
a period of six months into a Private or Public Company.
Que 6:- The Doctrine of Ultra Vires is an important doctrine which place limit
on the power of companies. Discuss the doctrine in the light of Ashbury
Railway Carriage and Iron Company Limited v. Riche.

Ans 6:- It is a Latin term made up of two words “ultra” which means beyond and “vires”
meaning power or authority. So we can say that anything which is beyond the authority or power
is called ultra-vires. In the context of the company, we can say that anything which is done by
the company or its directors which is beyond their legal authority or which was outside the scope
of the object of the company is ultra-vires.

Doctrine of Ultra-Vires

Memorandum of association is considered to be the constitution of the company. It sets out the
internal and external scope and area of company’s operation along with its objectives, powers,
scope. A company is authorized to do only that much which is within the scope of the powers
provided to it by the memorandum. A company can also do anything which is incidental to the
main objects provided by the memorandum. Anything which is beyond the objects authorized by
the memorandum is an ultra-vires act.

Origin of the doctrine

The doctrine of ultra-vires first time originated in the classic case of Ashbury Railway Carriage
and Iron Co. Ltd. v. Riche, (1878) L.R. 7 H.L. 653, which was decided by the House of Lords. In
this case the company and M/s. Riche entered into a contract where the company agreed to
finance construction of a railway line. Later on, directors repudiated the contract on the ground
of its being ultra-vires of the memorandum of the company. Riche filed a suit demanding
damages from the company. According to Riche, the words “general contracts” in the objects
clause of the company meant any kind of contract. Thus, according to Riche, the company had
all the powers and authority to enter and perform such kind of contracts. Later, the majority of
the shareholders of the company ratified the contract.  However, directors of the company still
refused to perform the contract as according to them the act was ultra-vires and the shareholders
of the company cannot ratify any ultra-vires act.

When the matter went to the House of Lords, it was held that the contract was ultra-vires the
memorandum of the company, and, thus, null and void. Term “general contracts” was interpreted
in connection with preceding words mechanical engineers, and it was held that here this term
only meant any such contracts as related to mechanical engineers and not to include every kind
of contract. They also stated that even if every shareholder of the company would have ratified
this act, then also it had been null and void as it was ultra-vires the memorandum of the
company. Memorandum of the company cannot be amended retrospectively, and any ultra-vires
act cannot be ratified.

What is the need or purpose of the doctrine of ultra-vires?

This doctrine assures the creditors and the shareholders of the company that the funds of the
company will be utilized only for the purpose specified in the memorandum of the company. In
this manner, investors of the company can get assured that their money will not be utilized for a
purpose which is not specified at the time of investment. If the assets of the company are
wrongfully applied, then it may result into the insolvency of the company, which in turn means
that creditors of the company will not be paid. This doctrine helps to prevent such kind of
situation. This doctrine draws a clear line beyond which directors of the company are not
authorized to act. It puts a check on the activities of the directors and prevents them from
departing from the objective of the company.

Difference between an Ultra-Vires and an Illegal act

An ultra-vires act is entirely different from an illegal act. People often mistakenly use them as a
synonym to each other, while they are not. Anything which is beyond the objectives of the
company as specified in the memorandum of the company is ultra-vires. However, anything
which is an offense or draws civil liabilities or is prohibited by law is illegal. Anything which is
ultra-vires, may or may not be illegal, but both of such acts are void-ab-initio.
The doctrine of ultra-vires in Companies Act, 2013

Section 4 (1)(c) of the Companies Act, 2013, states that all the objects for which incorporation of
the company is proposed any other matter which is considered necessary in its furtherance
should be stated in the memorandum of the company.

Whereas Section 245 (1) (b) of the Act provides to the members and depositors a right to file a
application before the tribunal if they have reason to believe that the conduct of the affairs of the
company is conducted in a manner which is prejudicial to the interest of the company or its
members or depositors, to restrain the company from committing anything which can be
considered as a breach of the provisions of the company’s memorandum or articles.

Basic principles regarding the doctrine

1. Shareholders cannot ratify an ultra-vires transaction or act even if they wish to do so.
2. Where one party has entirely performed his part of the contract, reliance on the
defense of the ultra-vires was usually precluded in the doctrine of estoppel.
3. Where both the parties have entirely performed the contract, then it cannot be
attacked on the basis of this doctrine.
4. Any of the parties can raise the defense of ultra-vires.
5. If a contract has been partially performed but the performance was insufficient to
bring the doctrine of estoppel into the action, a suit can be brought for the recovery of
the benefits conferred.
6. If an agent of the corporation commits any default or tort within the scope of his
employment, the company cannot defend it from its consequences by saying that the
act was ultra-vires.

Exceptions to the doctrine

1. Any act which is done irregularly, but otherwise it is intra-vires the company, can be
validated by the shareholders of the company by giving their consent.
 2. Any act which is outside the authority of the directors of the company but otherwise it
is intra-vires the company can be ratified by the shareholder of the company.
3. If the company acquires property in a manner which is ultra-vires of the contract, the
right of the company over such property will still be secured.
4. Any incidental or consequential effect of the ultra-vires act will not be invalid unless
the Companies Act expressly prohibits it.
5. If any act is deemed to be within the authority of the company by the Company’s Act,
then they will not be considered as ultra-vires even if they are not expressly stated in
the memorandum.
6. Articles of association can be altered with retrospective effect to validate an act which
is ultra-vires of articles.

Types of ultra-vires acts and when can an ultra-vires act be ratified?

Ultra-vires acts can be generally of four types:

1. Acts which are ultra-vires to the Companies Act.

2. Acts which are ultra-vires to the Memorandum of the company.
3. Acts which are ultra-vires to the Articles of the company but intra-vires the company.
4. Acts which are ultra-vires to the directors of the company but intra-vires the
company.

Acts which are ultra-vires to the Companies Act

Any act or contract which is entered by the company which is ultra-vires the Companies Act, is
void-ab-initio, even if memorandum or articles of the company authorized it. Such act cannot be
ratified in any situation. Similarly, some acts are deemed to be intra-vires for the company even
if they are not mentioned in the memorandum or articles because the Companies Act authorizes
them.

Acts which are ultra-vires to the memorandum of the company

An act is called ultra-vires the memorandum of the company if, it is done beyond the powers
provided by the memorandum to the company. If a part of the act or contract is within the
authority provided by the memorandum and remaining part is beyond the authority, and both the
parts can be separated. Then only that part which is beyond the powers is considered as ultra-
vires, and the part which is within the authority is considered as intra-vires. However, if they
cannot be separated then whole contract or act will be considered as ultra-vires and hence, void.
Such acts cannot be ratified even by shareholders as they are void-ab-initio.

Acts which are ultra-vires to the Articles but intra-vires to the memorandum

All the acts or contracts which are made or done beyond the powers provided by the articles but
are within the powers and authority given by the memorandum are called ultra-vires the articles
but intra-vires the memorandum. Such acts and contracts can be ratified by the shareholders
(even retrospectively) by making alterations in the articles to that effect.

Acts which are ultra-vires to the directors but intra-vires to the company

All the acts or contracts which are made by the directors beyond the powers provided to them are
called acts ultra-vires the directors but intra-vires the company. The company can ratify such acts
and then they will be binding.

Development of the doctrine

Eley v The Positive Government Security Life Assurance Company, Limited, (1875-76) L.R. 1
Ex. D. 88

It was held that the articles are not a matter between the company and the plaintiff. They may
either bind the members or mandate the directors, but they do not create any contract between
plaintiff and the company.
The Directors, &C., of the Ashbury Railway Carriage and Iron Company (Limited) v Hector
Riche, (1874-75) L.R. 7 H.L. 653.

The objects of the company as per the memorandum of association were to supply and sell some
material which is required in the construction of the railways. Here the contract was for
construction of railways which was not in the memorandum of the company and thus, was
contrary to them. As the contract was ultra-vires the memorandum, it was held that it could not
be ratified even by the assent of all the shareholders. If the sanction had been granted by passing
a resolution before entering into the contract, that would have been sufficient to make the
contract intra-vires. However, in this situation, a sanction cannot be granted with a retrospective
effect as the contract was ultra-vires the memorandum.

In Shuttleworth v Cox Brothers and Company (Maidenhead), Limited, and Others, [1927] 2 K.B.
9

It was held that if a contract is subject to the statutory powers of alteration contained in the
articles and such alteration is made in good faith and for the benefit of the company then it will
not be considered as a breach of the contract and will be valid.

In Re New British Iron Company, [1898] 1 Ch. 324

It was held that in this particular case the directors will be ranked as ordinary creditors in respect
of their remuneration at the time of the winding-up of the company. This was stated because
generally articles are not considered as a contract between the company and the directors but
only between shareholders. However, in this particular case, the directors were employed, and
they had accepted office on the footing of the articles of association. So at the time of winding-
up of the company they were considered as the creditors.

Rayfield v Hands and Others, [1957 R. No. 603.]

Field-Davis Ltd. was a private company carrying on business as builders and contractors,  The
plaintiff, Frank Leslie Rayfield, was the registered holder of 725 of those shares, and the
defendants, Gordon Wyndham Hands, Alfred William Scales and Donald Davies were at all
material times the sole directors of the company. THere was a provision in the Articles of
association of the company where it was required that if he wants to sell his shares, he will
inform the directors, who will buy them equally at a fair valuation. However, when he informed
the directors, they refused to buy them by saying that there is no such liability imposed by the
articles upon them.

The plaintiff claimed that fair value of the shares must be determined and directors must be
ordered to purchase them at a fair value. It was held that articles of the company required the
directors to buy the shares at a fair price, but the relationship between them was not as a member
and director but as a member and a member.

Effects of ultra vires Transactions – Doctrine of Ultra Vires

1. Void ab initio: The ultra vires acts are null and void ab initio. These acts are not
binding on the company. Neither the company can sue, nor it can be sued for such
acts.[Ashbury Railway Carriage and Iron Company v. Riche].                                     
2. Estoppel or ratification cannot convert an ultra-vires act into an intra-vires act.
3. Injunction: when there is a possibility that company has taken or is about to undertake
an ultra-vires act, the members can restrain it from doing so by getting an injunction
from the court. [Attorney General v. Gr. Eastern Rly. Co., (1880) 5 A.C. 473].
4. Personal liability of Directors: The directors have a duty to ensure that all corporate
capital of the company is used for a legitimate purpose only. If such funds are
diverted for a purpose which is not authorized by the memorandum of the company, it
will attract a personal liability for the directors. In Jehangir R. Modi v. Shamji Ladha,
[(1866-67) 4 Bom. HCR (1855)], the Bombay High Court held, “A shareholder can
maintain an action against the directors to compel them to restore to the company the
funds of the company that have by them been employed in transactions that they have
no authority to enter into, without making the company a party to the suit”.
Criminal action can also be taken in case of a deliberate misapplication or fraud. However, there
is a small line between an act which is ultra-vires the directors and acts which are ultra-vires the
memorandum. If the company has authority to do anything as per the memorandum of the
company, then an act which is done by the directors beyond their powers can also be ratified by
the shareholders, but not otherwise.

1. If any property is purchased with the money of the company, then the company will
have full rights and authority over such property even if it is purchased in an ultra-
vire manner.
2. Relationship of a debtor and creditor is not created in an ultra-vires borrowing. [In
Re. Madras Native Permanent Fund Ltd., (1931) 1 Com Cases 256 (Mad.)].

Effects of an act which is Ultra Vires – on borrowings

Any borrowing which is made by an act which is ultra-vires will be void-ab-initio. It will not
bind the company and company and outsiders cannot get them enforced in a court.

Members of the company have power and right to prevent the company from making such ultra-
vires borrowings by bringing injunctions against the company.

If the borrowed funds of the company are used for any ultra-vires purpose, then directors of the
company will be personally liable to make good such act. If the company acquires any property
from such funds, the company will have full right to such property.

No estoppel or ratification can convert an ultra-vires borrowings into an intra-vires borrowings,

as such acts are void from the very beginning. As no debtor and creditor relationship is created in
ultra-vires borrowings only a remedy in rem and not in personam is available.

Doctrine likely to lose sanctity

It is proposed in the Companies Amendment Bill,2016 that instead of adopting a universal
memorandum, business will be free to adopt a model memorandum of association. So now the
new companies will be enjoying the benefit of having a single object clause which states that
they will be engaged in any lawful act or business. In this situation, it would be challenging to
trace out that which act is ultra-vires and which act is intra-vires. The only case where it will be
possible will be when a company specifies the exact business instead of just a general clause.

No company can be imagined to run without borrowings. However, at the same time, it is
necessary to protect the interest of the creditors and investors. Any irregular and irresponsible act
may result in insolvency or winding up of the company. This may cause considerable losses to
them. So to protect the interest of the investors and the creditors, specific provisions are made in
the memorandum of the company which defines the objectives of the company.

Directors of the company can act only within the purview of the authority provided to them
under these objectives. If any borrowing is made beyond the authority provided by these
objective mentioned in the memorandum, it will be considered as ultra-vires. Any borrowing
which is made through an ultra-vires act is void-ab-initio, and hence, directors are personally
responsible for these acts. However, if such borrowings are ultra-vires only to the articles of the
company or ultra-vires directors, then they can be ratified by the shareholders. Then after such
ratification, they will be considered valid.

Thus, directors must be very cautious while borrowing funds, as it may not only make them
personally liable for the consequences of such acts but also may result in considerable losses to
investors and creditors.

Que 7:- Discuss the doctrine of lifting of corporate veil in the light of decided
cases. What are the judicially evolved grounds for lifting of veil?

Ans 7:- The corporate veil is the term given to the imaginary barrier that separates the company
from those who direct it and from those who own it. The chief advantage of incorporation is, of
course, the separate legal entity of the company and limited liability. But in reality, it is the
persons who form the association that carry out the business on behalf of the incorporated
corporation. That is, though in fiction of law, a corporation is a distinct entity, in reality, it is an
association of persons who are in fact the beneficiaries of the corporate personality. Thus the
attribution of legal personality on incorporation is a privilege given to the companies.

But there may arise instances where under the shade of this, fraudulent or illegal acts are
committed. As artificial persons are incapable of doing anything illegal or fraudulent, the façade
of the corporate personality have to be removed to identify the persons who are really guilty.
This principle which goes in contrary to the general rule under Salomon is known as ‘lifting of
corporate veil’. Thus lifting of corporate veil is resorted to know the realities under the corporate
veil. Though it is in contrast to the rule in Salomon, it do not renders the same as invalid. The
principle presupposes the existence of corporate identity, which may be lifted for the interests of
the members in general or in public interest to identify and to impose liability on those who
misuse the privilege conferred on them. Where the judiciary or the legislature have decided that
the separation of the personality of the company and members are to be maintained, the veil of
incorporation is thus said to be lifted.

Thus the piercing (or lifting) of the corporate veil refers to the possibility of looking beyond the
company framework to make the members liable, as an exception to the rule that they are
normally shielded by the corporate law.

Evolution of the Concept

Since Salomon decision, the courts have come across many situations wherein they were called
upon to apply the principle of separate legal person in what might be called different situations.
Though not as a general rule, the courts were resorting to the contrary of what had been laid
down in Salomon on various grounds whenever it seemed just to do the same or whenever
special circumstances demanded the same. Thus it leaves no room for doubt with regard to the
factum of identification and acknowledgement of the concept of ‘lifting of corporate veil’,
though the recognition of a concept going against or which is anti-directional to the law as
expounded by the House of Lords made space for various other contradictions and fogginess in
the legal system and jurisprudence.

The explanations as given by courts while resorting to the adoption of the theory of lifting of
corporate veil often led to issues. Many attempts were made in providing explanations for the
instances under which the courts may lift the corporate veil disregarding the separate corporate
entity. But none of these were really satisfactory. Attempts have been made to classify the
various instances under categories such as where there is fraud, where there exists employment
issues, where there exists impropriety issues, when the company is merely a sham or façade, or
where a group of companies act as a single economic entity and under these instances, the courts
may lift the veil to see what the realities are.

In 1990, Ottolenghi resorted to classifying the various instances into categories based on the
approach analysing the trend of judicial interference in such matters. Where the veil of
incorporation is lifted to get member information, the same fell under the head ‘peeping’. At
certain times, the veil had to be ‘penetrated’ to disregard the concept of limited liability so as to
fix liability upon the members of the company. ‘Extending’ was resorted where a group of
companies were to be treated as one legal entity and ‘ignorance’ referred to the non-recognition
of company at all.

The evolution of the concept and instances of ‘lifting of corporate veil’ is traced down through
three phases by Alan and John. The ‘Classical Veil Lifting’ (1897-1966) saw courts falling back
heavily upon the Salomon ratio. The House of Lords decision in Salomon dominated in this
period thereby acting as a restraint on veil lifting. But gradually, the courts began to lift veil of
incorporation so as to tackle certain identified exceptional circumstances. One of the earlier
decisions in this regard was Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain)
Ltd.  wherein the court lifted the veil to determine as to whether the company in question was an
‘enemy’ or not. Followed were the decisions in Gilford Motor Co. Ltd. v. Horne, Re Bugle
Press and John v. Lipman identifying façade and sham as grounds for lifting the corporate veil. It
is worthy to note that even when the courts lifted veil at instances, this was not generally resorted
to and was done only in exceptional cases. The courts were placing strong reliance on the
Salomon decision and chose not to give away with the limited liability principle unless
exigencies forced them to do so.

Whereas, by 1960s, the courts were increasingly demonstrating a tendency to free themselves
from the old precedence which they saw as increasingly unjust. Identified as the ‘Interventionist
Years’ (1966-1989) this phase probably saw the highest rate of intervention made by the courts
to treat the separate personality of companies as an initial negotiating position which could be
overturned in the interests of justice. Relying vehemently on the Littlewoods Mail Order Stores
v. IRC  decision that laid down that the courts may do away with the Salomon rule to ensure
justice and for that reason, the courts may look beyond the veil, courts frequently resorted to
lifting or piercing of corporate veil. It won’t be wrong to state that this led to uncertainty with
regard to the law relating to corporate personality.

The 1990 decision of Adams v. Cape Industries Plc of the Court of Appeal finally put the
uncertainty to rest. It went on to discuss the conflict between the classical and the interventionist
view and concluded in favour of the classical view. This phase identified as ‘Back to Basics’
(1989-present) took a U-turn to the classical view holding that the Salomon rule cannot be
disregarded merely on the ground that justice so requires. There can be identified grounds under
statute or contract or as identified under judicial interpretations which are well settled to lift the
veil; but the same cannot be seen as a general rule. The rule of lifting of veil is strictly to be
applied to ‘you know it when you see it’ cases. Furthermore, Woolfson v. Strathclyde Regional
Council insisted on the application of the rule in special circumstances alone and where the
motive is well established.

Thus Adams significantly narrowed the ability of courts to lift the veil in contrast to where the
Court of Appeal would lift the veil to achieve justice irrespective of the legal efficacy of the
corporate structure.

Instances of Lifting of Corporate Veil

The circumstances under which the courts may lift corporate veil may broadly be grouped under
the following heads: (1) Under statutory provisions, (2) Under judicial interpretations.

4.1.Under Statute

The corporate veil may be lifted or pierced under certain instances and some of these are
explicitly given within the statues enabling the court to do the same. In Cotton Corporation of
India Ltd. v. G.C. Odusumath laid down the rule that the courts can lift corporate veil only when
provisions for the same is expressly provided within the statute book or only if there are any
compelling reasons. The classical view of lifting of veil also is in line with this approach. It is in
this context that an understanding of such provisions gains relevance.

The Companies Act, 2013 provides for the following provisions enabling courts to lift the
corporate veil.

Often, courts lift the corporate veil to fix liability and punish the members or the directors of the
company. Section 7(7) of the Act provides one such provision. Where the incorporation of a
company is effectuated by way of furnishing false information, the court may fix liability and for
this purpose, the veil may be lifted.

Section 251(1) also is a penal provision. The Act asks for the submission of an application for
the removal of name of the company from the registrar of the companies. Any who make
fraudulent application is fixed with liability under thus section.

Section 34 and 35 of the act also enable the courts to lift the veil of incorporation to fix liability.
When prospectus includes misrepresentations, the court may impose compensatory liability upon
the one who misrepresented.

The Companies Act provides that in cases of issue of shares to public, in the event of the
company not receiving the minimum subscription in 30 days of issuance of prospectus, the
company is bound to return the application money. Section 39 imposes penalty on failure to do
this within 15 days’ time period.

There might be instances where the investigators or the concerned authority or the government
may have to look into the affairs of a company for the purpose of evaluating whether it is a sham
and the realities under its corporate veil. Section 216 is the enabling provision to carry out this
purpose. For manifesting the same, the courts may pierce the veil and the same is protected.
Section 219 of the Act also does the same function.

The chances of members resorting to fraudulent conduct is high particularly during the course of
winding up of a company. This is condemned under Section 339. To evaluate the prospects of
the same, the veil may be lifted.

Section 464 of the Act imposes penal liability on the members and directors of the company
when the requirements of incorporation are not complied with. Incorporation brings with it added
privileges and therefore the law imposes preconditions on its enjoyments in the form of statutory
compliances, the non-observance of which may attract liability. Thus the factum of manifestation
of the same may be investigated into and for this purpose, the veil may be lifted.

Besides Companies Act, 2013, certain provisions of Income-Tax Act and Foreign Exchange
Regulation Act, 1973 also enables the lifting of corporate veil.

4.2.Under Judicial Interpretation

The principle of corporate veil as a concept got evolved post Salomon under Common Law. The
classical approach had identified certain categories of instances under which the veil of
incorporation may be lifted. This includes the agency argument, single economic entity
argument, façade or sham, impropriety and determination of enemy. It is noteworthy that the
same had been identified and acknowledged in India too.

4.2.1 Instances identified under Common Law and the recognition of the same under Indian Law
Jones v. Lipman, (1962) I.W.L.R 832 is a classic example where the veil was lifted on the
ground of fraud or improper conduct (impropriety). In this case, A made a sale agreement with
B. But before its completion, A transferred the property in question to a company created by him
in which he and his clerk were the only directors cum members. This led to a litigation wherein
in the court found out that his action had malice tint attached to it whereby he tried to evade
claims of specific performance.

In Re: R.G Films Ltd., identified the agency argument. In this case, an American production
company decided to produce a film in India under the banner of a British Company. When
application was made for its certification as a British production film, the application was
rejected. The court in this instance, applied the doctrine of lifting of corporate veil to understand
the intricacies of the issue. The court came to the conclusion that the British company was
merely an agent as the majority investment came from the American company thus holding that
the stand taken by the certification authority was right.

Company being an artificial person cannot be an enemy or a friend. But in the instances of war, it
may become necessary to lift the veil to see whether the actions of the company is actually that
of a friend or an enemy. This principle of determination of enemy came to be established
in Daimler Co. Ltd. v. Continental Tyre & Rubber Co. In Connors Bros. v. Connors, the court
found out that the director having the de facto control of the company being the resident of
Germany, an alien country, allowing the proceedings of the company would result in giving
money to the enemy country. Thus the company was held to be an enemy.

Façade or sham refers to that situation where what is seen on the face is not the reality, rather it
is the contrary of it. Subhra Mukherjee v. Bharat Coking Coal Ltd. involved an issue with regard
to a private coal company. The company on getting intimation as to nationalisation of the
company, transferred the immovable assets of the company to the wives of the directors. The
court on lifting the veil of incorporation concluded that the transaction was not made in the
interests of the company, but in the interests of the directors and therefore is a sham.
It is not barred under corporate law to have a subsidiary company. The holding company may or
may not have complete control over the subsidiary company. Irrespective of this fact, the law
identifies separate legal identities for both the holding and the subsidiary company. But at times,
on lifting the veil, it had been found out that there might be instances where both the companies
may be identified as a single economic entity.

In Merchandise Transport Ltd. v. British Transport Communications, a transport company made

application for licenses and on rejection of the same, they made applications in the name of its
subsidiary company. The court found out that the subsidiary company conducted no business nor
had any income. The same was created merely for obtaining the licenses and therefore both the
companies were acting towards a common cause. Thus they were identified as a single economic
entity. J.B Exports Ltd. v. BSES Rajadhani Power Ltd. also identified the same principle.

4.2.2. Other grounds evolved under Indian Jurisprudence

The following are those instances under evolved under Indian Jurisprudence which enables the
courts to lift the corporate veil. The Supreme Court of India had acknowledged this principle
long back. While LIC v. Escorts Ltd. was in line with the classical view, U.P v. Renusagar
Power Co. went in favour of the interventionist approach. But it is worthy to note that the
though Renusagar is not overruled, this is not the rule to be followed. The Apex court from time
to time have reiterated that the lifting of corporate veil can be resorted to only in exceptional
circumstances and that the same cannot be treated as a general rule.

The specifically identified grounds hereinafter mentioned does not go against the classical idea.
The statement that the same goes in contrary to the classical idea would be an untenable
statement. The same were evolved under varying circumstances, but essentially falling under the
identified classical heads, thereby forming subsets of the same.

In Re. Dinshaw Maneckjee Petit, a wealthy man enjoying large dividend and interest from
income formed four companies and transferred all of his interests and dividends to the
companies. The companies had no other business and transferred back all the investments made
to the assesse by way of pretended loans. Essentially falling under façade and impropriety, the
court held that the same was done to evade taxes upon lifting the veil.

In The Workmen Employed in Associated Rubber Industries Ltd., Bhavnagar v. The Associated
Rubber Industries Ltd., Bhavnagar the company in question created a wholly controlled
subsidiary company which performed no business, but received dividends from the principal
company. The court upon lifting the corporate veil came to the conclusion that this action was
purported in order to split the dividends so that a reduced bonus amount may be given to the
employees. This was found as an act in order to avoid a welfare legislation and the same was
identified as a valid ground for lifting the veil of incorporation.

In cases of economic offences, a court is entitled to lift the veil of corporate entity and pay regard
to the economic realities behind the legal façade. In Santanu Ray v. UOI, the company was
alleged of violation of Section 11 of Central Excise and Salt Act. The court went on to hold that
corporate veil could be lifted to know which of the directors was concerned with evasion of
excise duty for reason of fraud, concealment or wilful misrepresentation or suppression of facts.

Contempt of Court as identified in Jyoti Limited v. Kanwaljit Kaur Bhasin, is another identified
ground to lift the corporate veil. In this case, a firm of two partners agreed to sell property, which
got cancelled in a subsequent stage. This was followed by litigation wherein the court gave an
injunction order restraining all forms of transactions with regard to the property in question. But
the company went on and flouted a private company into sale. It was held that on lifting the
corporate veil, it could be deciphered that the company was promoted solely by respondents and
therefore the interests of the company were that of merely the two. Thus the sale amounted to
contempt of court and the members were made liable. Wherever the members of a company
violates any statutory provisions or carry out any non-desirable activities under the guise of the
corporate veil above the company, thereby misuse the privilege conferred to them, the courts are
entitled to look beyond the veil, and this is known as lifting of corporate veil. But this is not a
general rule and have to be applied only under exceptional circumstances. This leaves way for
the instances under which the same could be done to be identified. Evolved through common
law, the identified grounds are façade or sham, impropriety, single economic entity argument,
evasion of taxes, avoidance of welfare legislation etc. It is worthy to note that what is important
is the nature of the case. As it is an exceptional rule, the standard of scrutiny before its
application is high. In conclusion, the test is whether the instances are crystal clear within
statutes or whether the same are identified under the classical view or would fall within the same.